Traders cited concerns about the sharp decline in the GDP deflator to –1.2% as evidence that Japanese economy continues to wallow in  deflation. For now, as UBS research points out, the USD/JPY remains more of a instrument for speculation on yuan revaluation rather than a trade on Japanese growth. Nevertheless, if eco data continues to produce positive surprises, the divergence between yen fundamentals and USD/JPY price action is likely to be resolved in favor of the JPY and the pair could test the 104 figure sooner rather than later.

In Euro-land tonight EUR/USD has firmed to 1.2650 both as a delayed response to yesterday poor US data and as anticipation of muted US PPI numbers due 12:30 GMT.  The fact that  Empire Manufacturing printed a woeful –11.1 vs. 11 projected should command the attention of traders everywhere. As we noted in our weekly piece, the highly volatile index is often early but rarely wrong. Two months in a row of highly negative surprises  may be a signal that US growth is weaker than it seems